Big banks face surtax in Washington state after court upholds 2019 law

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Big banks operating in Washington state will have to pay more taxes after a court upheld a plan to boost state revenues that specifically targets large financial institutions.

Unanimously opinion The Washington Supreme Court on Thursday rejected the argument, made by commercial banking groups, that the 2019 tax law discriminates against businesses located out of state. The decision overturned the decision of a court of first instance which sided with industrial groups.

The two-year-old law imposes a surtax on certain financial institutions with annual company-wide net income of at least $ 1 billion, whether they are based in Washington state or elsewhere. Industry groups had argued that the law nonetheless targeted banks outside the state, in violation of the part of the U.S. Constitution that gives Congress the right to regulate interstate commerce.

“Although the Court ultimately disagreed with our arguments,” the Washington Bankers Association and the American Bankers Association said in a joint statement, “we continue to believe that a tax that is not in effect made paid only by banks based out of state or otherwise heavily engaged in interstate commerce violates the US Constitution.

The law came into effect on January 1, 2020, and in the first three months of last year, the only period for which data was available, the Washington state government received $ 34 million in revenue from 153 financial institutions subject to the new law, including three companies based in the State of Evergreen. The law covers not only banks, but also certain other businesses which derive more than half of their gross receipts from activities that a bank would be allowed to carry out.

By law, financial institutions that meet the $ 1 billion net income requirement must pay a surtax equal to 1.2% of their gross income from Washington business activity. The surtax for large corporations is in addition to a 2.7% tax on gross government income that applies to all financial institutions, regardless of their size.

The top five banks in terms of deposit shares in Washington state – Bank of America, JPMorgan Chase, Wells Fargo, US Bank, and KeyBank – are all based elsewhere. Spokesmen for the five banks, all of which reported more than $ 1 billion in net income last year, declined to comment on the court ruling.

The state Supreme Court’s decision was praised by Andy Nicholas, senior researcher at the Washington State Budget & Policy Center, one of the many organizations that jointly filed a brief in support of the surcharge. He called the 2019 law an attempt by the legislature to remedy a tax system that exacerbates wealth inequalities.

“Washington has a notoriously regressive and reversed local and state tax code,” Nicholas said.

The state legislature made a similar argument in a note attached to the 2019 tax law, which suggested that a large business tax would ultimately be paid largely by wealthy people who are more susceptible than others. to be invested in the stock market.

“Washington’s tax system has a disproportionate impact on those who have the least ability to pay. As a percentage of household income, middle-income Washington families pay two to four times more in taxes than top-earners in the state, ”the note said.

“The legislature concludes that the wealthy few who have benefited the most from the recent economic expansion can contribute essential services and programs that all Washington families need. “

Banking sector groups, arguing that the tax discriminates against out-of-state banks, had underlined the remarks of a key legislative supporter aimed at encouraging a resurgence of local banks. But the state’s Supreme Court wrote that the statements were made in response to proposed amendments that had not been adopted and had been taken out of context.

Banking groups had also cited legislative talking points in support of the tax that the tax would not affect local banks and “help increase their competitiveness with the big banks.” But the court wrote that these talking points offered “little convincing evidence of discriminatory intent when compared to the explicit, non-discriminatory purpose” which was outlined in the text of the law and “echoed by lawmakers. “.

In their joint statement, the Washington Bankers Association and the American Bankers Association criticized the state legislature for its handling of tax law.

“The Legislature only considered the tax in the last days of its session, with very little public participation and debate,” the two professional groups said. “Legislation, especially complex tax bills, needs time to be properly scrutinized by the public and legislators to avoid costing government and taxpayers unnecessary time and money. “

Banking industry groups have said they will weigh their options following the state’s Supreme Court ruling.

One of those options is to appeal the decision to the U.S. Supreme Court, said Michael Lurie, tax attorney at Reed Smith who represents financial institutions that are likely to be subject to the Washington state surtax.

Another potential avenue, Lurie said, would be for a foreign bank subject to a tax to file an administrative challenge with the Washington State Department of Revenue on the grounds that it pays more tax than other local businesses. who do the same amount of business in the state. If such a challenge succeeds, he said, other banks could follow suit.


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